Krugman is trivially right and essentially wrong

by Ian Welsh

When
he says:

In fact, we know what a system in which banks are allowed
to fail looks like: that�s how the US banking system worked before the
creation of the Fed. And you know what? It wasn�t a smoothly
functioning system, with sound banking enforced by market discipline;
it was a system periodically wracked by �panics� that destroyed
peoples� savings and plunged the economy into recession.

Finally, because that�s what really happens when banks are allowed to
fail freely, promises not to bail out banks in the future aren�t
credible. Fail to reform finance now, and there will be two, three, many
TARPs in our future.

Again, small banks have been allowed to fail.  Today.  In large
numbers.  So it is credible that small banks will be allowed to fail in
the future.  It's not the only thing which has to be done, but it is a
necessary step.

The idea is that if any bank is small, no bank knows it specifically
is "too big to fail", and no bank thinks that it might not be one of the
banks allowed to fail.

Finance is not going to be reformed enough, in any case. You know
it, I know it, Krugman knows it.

TARP is a distraction.  It wasn't necessary in any case.  What
happened, that mattered, was done mostly by the Fed with Treasury's
collusion, but that 700 billion was never needed, since the Fed can pull
money out of its bum (and did.)

This is misleading:

Now, in 2008-2009 the shareholders were not cleaned out,
and the bondholders left untouched; in part this was a policy decision,
but it was also influenced by the lack of �resolution authority�:
there was no clean, well-established route for seizing complex
financial institutions. We can fix that, and deal with future
Citigroups (one of which, given history, is likely to be � Citigroup)
the way the FDIC deals with smaller banks: protect the depositors,
clean out the shareholders.

This was entirely a policy decision.  While, no, the FDIC hadn't
closed down anything as big as Citigroup before (because before
Glass-Steagall was repealed it was illegal to be as large as
Citigroup), it had all the authority it needed and could have taken over
Citigroup any time it wanted to.

This is a Bush response.  "I fucked up and didn't do the right thing,
so I need more authority, even though I had all the necessary
authority."

Granted, better regulation is needed, but the parts of regulation
which failed were prior to the financial collapse.  The necessary
authority to wipe out shareholders was in place.  That was a policy
decisions�a political decision.  Neither Bush nor Obama was willing to
greenlight the FDIC to do its damn job.

This is perhaps the stupidest disagreement I've seen in some time: no
one who thinks breaking up banks is necessary thinks it is sufficient. 
Why is Krugman acting as if they do?  Why does he want to protect large
banks from breakup?  Why are we even talking about this?